How to get started on a risk-based approach to third-party management

Companies interact with thousands of third parties. Even small companies have connections outside their walls with vendors, joint venture partners, customers, licensed distributors, royalty owners, supply chain intermediaries and even competitors that can impact their achievement of objectives.

“The number of third parties can be astounding and those relationships carry risk. So, a risk-based approach is needed ensure the most critical risks are considered,” says Jody Allred, partner in Risk Advisory Services at Weaver.

Smart Business spoke with Allred about how organizations can get started on assessing and managing third-party risks.

Why is this becoming more important?

As globalization and outsourcing have expanded so that companies can stay competitive, it’s become more evident that companies can be responsible for the actions of the third parties they work with. Companies need to take ownership even in an outsourced environment, especially consumer products companies and retailers concerned about reputation management.

There is also the issue of higher corporate visibility due to new regulatory requirements. One example of this is the SEC’s conflict minerals disclosure rule that requires companies to disclose the origin of certain metals from Central Africa.

What can happen if these risks aren’t managed?

Several incidents in the news highlight the need for third-party risk management. For example, Apple has faced significant concerns over the labor practices of its primary supplier of iPhone and iPad assembly in China. While this issue came to light in 2011, it continued in the news throughout 2013 and still lingers today.

In another instance, an HVAC contractor had access to Target’s internal network for billing and project communication. In 2012, the contractor’s account was leveraged to gain access to the network and plant malware that resulted in 40 million stolen credit cards, a 46 percent drop in fourth quarter profit in 2013 and the removal of the company’s CEO.

Do companies typically take the time to manage third-party risk?

The largest, first-class organizations and those in highly regulated industries like banking and insurance may have third-party risk management programs, but the average manufacturer or oil and gas company likely has not fully dealt with this issue.

How can organizations get started?

The biggest hurdle is obtaining the information needed to evaluate third-party risk because most companies don’t capture and collect the necessary data to build risk profiles. In order to properly evaluate their vendors and other external relationships, organizations must consider:

  • Financial stability.
  • Control environment.
  • Technology environment.
  • Dependency.
  • Access to information and intellectual property.
  • Items critical in the supply chain.
  • Regional risk.
  • Operational characteristics.
  • Regulatory and compliance interaction.

If you don’t have this information on-hand, you can build processes to capture the data over time. You have to start somewhere. So, consider what information you do have, and rate your third parties based on the financial, regulatory, operational and reputational risks. You cannot tackle thousands of vendors at once, but you can focus on those that present the most risk using your initial risk-based scoping.

Once you establish more formal protocols, you can build an evolving third-party risk management function to identify and respond to all risks on an ongoing basis. This may include auditing a vendor, implementing a compliance program, establishing corporate guidelines and/or better communicating your expectations.

Do you have any other recommendations?

Third-party risk management requires communication and collaboration across the organization — business units, senior management, operations and administration. It cannot be a siloed responsibility of a compliance group. Organizations that spend time to identify, understand, manage and navigate risk benefit from insights into risk influences that are strategic to business success.

Insights Accounting is brought to you by Weaver

Learning what your organization is really worth can bring dividends

The value of a business is commonly a large portion of its owner’s net worth.

Understanding what the business is really worth, or could be worth, allows an owner to make important decisions regarding key issues like retirement, estate planning and choosing a business successor.

A frequent question owners ask is, “What is my business worth?” The answer is not necessarily what the assets would sell for — a common misunderstanding of owners.

Smart Business spoke with James F. Schultz, principal at Cendrowski Corporate Advisors LLC, about how the sale value of a business is properly determined.

How is the value of a business determined?

The first step is to hire an independent valuator to determine the realistic sales price of the business.

This important step should be done by a professional experienced in merger and acquisition processes and in valuation analyses. The valuator will look at the business and use the standard valuation approaches of asset, income and market to estimate the enterprise value of the business.

For most operating businesses, the income and/or market approach will have the most influence in estimating the sale value of the business. Research is needed into the industry of the business to find trends and key economic factors driving profitability.

Next, a look at sales of comparable businesses in the industry can provide various multipliers of income factors that can be applied to the business. If comparable sales are not available, estimating proper investment returns on income based on risk/reward analysis will estimate value.

When applying the income approach, it may be necessary to identify synergies/cost savings created from the sale. This will enable the valuator to establish investment value (to an acquirer) rather than fair market value (to a hypothetical purchaser).

In cases where the return on investment is low and/or little labor is involved, the asset method may be more applicable.

What happens after the enterprise value is estimated?

The next step is to estimate what the purchaser will actually receive from the seller.

Most sale transactions today are structured as asset sales rather than stock sales. In an asset sale transaction, specifically identified assets and liabilities of the selling company will be transferred to the purchaser. The purchaser will require all the fixed assets necessary to run the business, which can range from computer systems to manufacturing machinery.

In addition to the fixed assets, the purchaser acquires various intangible assets and rights relative to trade names, patents, goodwill, occupancy/lease rights, client lists and vendor lists, to name a few. The more difficult item to quantify is the level of working capital that the purchaser will require as part of the sale transaction.

The purchaser is looking to acquire an operating business and the necessary liquidity to allow the business to continue to operate in a smooth fashion without requiring additional equity amounts.

The items typically included in working capital are accounts receivable, inventory and accounts payable.

The net value of those amounts need to provide a liquid cushion to continue business operations. The sale negotiations will normally determine the appropriate level of liquidity, and an adjustment of the purchase price may be required if the level is not met or if there is an excess when the sale closes.

In most cases, the purchaser will not assume liabilities other than trade payables.

After estimating the purchaser’s requirements, what are the final steps?

The final step is to analyze the existing balance sheet of the company for items that will not be transferred to the purchaser.

This typically consists of cash, investments and other non-operating assets on the asset side, and all liabilities excluding trade accounts payable on the liability side. The net value from the combination of the aforesaid items is then added to/subtracted from the enterprise value. The result of that computation is the estimated net sale proceeds of the business.

In order to determine what the owner will be able to put in the bank, an estimate of the income taxes related to the sale transaction should be calculated. That amount is subtracted from the estimated sale proceeds to determine the after-tax cash available to the owner. ●

Insights Accounting is brought to you by Cendrowski Corporate Advisors LLC

Three essential tips to help architects build a more profitable design firm

In the world of architecture, anything is possible on paper. Successful firms recognize, however, that designs need to be rooted in reality in order to both satisfy clients and remain a profitable business.

“Architects often live more on the artistic side,” says Jeff Ong-Siong, CPA, a partner in the real estate group at RBZ. “You come up with a concept and it looks great in your drawings. But sometimes, as great as it looks, you have to walk away from it because it’s just not feasible or because the cost will be more than what you are going to take out of the project. Eventually, your firm has to make money.”

The ability to balance artistic creativity with fiscal discipline can go a long way toward determining your firm’s future.

Smart Business spoke with Ong-Siong about the three keys to staying on top of your business in the architectural world.

Tip No. 1: Watch your costs

Let’s say you need two junior architects to help you with a certain phase of a project.

As you get into it, you realize you need a third person because the two of you aren’t able to get the job done. Now, your cost has gone up by a third. Unless you regularly monitor those costs and make changes, you would not know that.

It’s common for architectural firms to hire outside consultants like a landscape architect or an elevator engineer. You have to track those costs to make sure you are within the original budget. If they’re not, you need to look at adjusting the budget.

Without reliable data, it is difficult to say where you are on a project. You may continue thinking that you are within your budget or if you’re not, you’ll make it up at the end of the project. Without a strong accounting system to track information, you may already be losing money before you get there.

Start accumulating the costs. Every bill that is paid out is related to a project. If you get an invoice from a consultant for project A and you pay it, you have to make sure that invoice goes to project A. Someone has to be tracking that.

These are simple steps, but it’s obviously very easy to get sidetracked. That’s why it’s critical to have someone whose job is to monitor these details and make sure they are being managed responsibly.

Tip No. 2: Seek strong accounting expertise

You need a strong accounting person who can capture information on costs and budgets to allow owners and project managers to see where the money is going. What stage are you on for a particular project?

Are you on target based on the budget? Did you confirm the actual costs before you responded to a request for proposal?

You also need a good accounting system to capture all the data and information. Make sure the project managers and owners continue to monitor the project cost on a regular basis.

Create a system so at any point in time, you can pull up that system and find out where you are with the budget compared to the actual costs incurred.

Tip No. 3: Demand accountability

Make sure, as the president or key executive, you highlight the importance of filling out your time and tracking changes every time you meet.

It’s very easy to slip back into old habits. If one of the key architects in your firm is not tracking his or her time and metrics, other people are going to ask, ‘Why should I do it?’
You have to be out there leading the way.

One thing you can do is every Monday, print a list of everyone’s time and say, ‘Hey, these are the five people who did not submit their time at the deadline.’

If those people are called out, your leaders need your support at the very top to say, ‘We need you guys to do this.’ ●

Insights Accounting is brought to you by RBZ

How oversight and a little skepticism can help curb fraud in the workplace

Business owners want to trust their employees. And many think their employees can do no wrong. But nowadays, many business owners are unfortunately being proven wrong. Workplace fraud is a serious issue that businesses across America are facing.

“Just because a business owner has complete trust in his or her employees — even longtime employees — and believes they’re immune to fraud, doesn’t mean they won’t get burned,” says Brent Ardit, CPA, audit manager at Rea & Associates.

“It’s important to have some level of professional skepticism,” he says. “Don’t cause friction within the organization, but you owe it to the company to have a level of oversight. Trust is definitely not an internal control.”

Smart Business spoke with Ardit about how the risk for workplace fraud drives the need for strong internal controls within a company.

Why would employees commit fraud?

One of the more common reasons an employee would commit fraud is because of financial trouble at home. He or she might think, ‘I’ll just take this little bit of money from my company now. No one will notice, and I promise I’ll return it. I’ll put it back once things get better.’

Several workplace fraud studies have shown that the economic recession the country experienced a few years back has led to a rise in workplace fraud.

How does workplace fraud occur?

Workplace fraud occurs most often when there’s a lack of segregation of duties. One person may be managing the majority of accounting and financial reporting tasks with little to no oversight. This increases the chances for fraud to occur.

What approach should a company take to clamp down on fraud?

First, there needs to be a tone-at-the-top approach. The company’s leadership has to set a good example for employees when it comes to managing the company’s finances.

In addition, business owners should examine the accounting department structure. After review, they may find more oversight is needed. A cost-benefit analysis can determine how to design a company’s internal control structure.

Business leaders may have great ideas for how to combat fraud, but if it’s going to cost the business more than what they would save, it might not be worth doing. The company should weigh all the options on how to reduce fraud. That may mean hiring additional staff to oversee finance functions, or it may mean a company restructures itself with existing staff to ensure that adequate financial oversight is established to deter fraud.

If a business has a single employee solely managing the accounting and finance functions, it should ensure that other employees are cross-trained in the individual’s tasks and responsibilities. Also, the business may want to ask the employee to take a vacation. If an employee refuses to take vacation, it may be a sign that something is amiss.

Is paying more attention to employee work alone a deterrent to fraud?

Regularly reviewing work, rather than waiting until year-end, is beneficial. If employees know that leadership is watching, it provides some level of deterrence. And if the temptation for fraud arises, the employee is inclined to avoid a violation since he or she knows they are being watched. It’s like the Hawthorne effect, which refers to the tendency that people will alter their behavior simply because they are being observed.

Are unannounced audits effective?

Yes, if a company has internal audit procedures, having an unannounced audit could prove effective. If employees know the company is watching and that an internal audit could take place at any time, they’ll probably be less likely to commit workplace fraud.

What’s the outlook for workplace fraud?

It’s critical that companies stay ahead of the issue. New schemes appear every day, and continued oversight and monitoring of reports will help head these off. If a company follows these guidelines, it can keep fraud to a minimum.

Insights Accounting is brought to you by Rea & Associates

How to know if your business needs audited financial statements

As a business owner, you know the value of audited financial statements. Audits provide essential credibility to stakeholders, both internal and external, regarding the accuracy and reliability of financial information. Without the third party assurance provided by audits, lenders and investors would be rightfully leery of making loans and investments.

While audits can be very valuable, there are also other financial reporting solutions that can be simpler and even more effective in the right situations.

Smart Business spoke with Stephanie Tsiagkas, audit partner at Sensiba San Filippo LLP, about the different reporting and assurance solutions available to businesses.

What are financial statement audits and when are they necessary?

Financial statement audits provide the highest level of assurance and can be extremely useful in securing equity and debt financing from third parties. Audits provide an unbiased, objective examination of the financial statements of the company, including the selective verification of specific information such as inventory.

Audits require gaining an understanding of internal controls, testing of selected transactions and communication with third parties. At the conclusion of an audit, an auditor will issue a report on the financial statements, which can be shared with third parties, containing the auditor’s opinion as to whether the financial statements are presented fairly, in all material respects, in accordance with generally accepted accounting principles (GAAP). If you need a high level of assurance for external stakeholders such as banks when trying to secure a loan, an audit can be extremely valuable.

When is a full financial audit not the best solution?

While there is no doubt audits are valuable tools, a financial audit isn’t always the best or the only solution. When the level of desired assurance does not require a full audit, a review, compilation or agreed-upon-procedures engagement may provide a simpler and more effective solution. Reviews are less extensive and provide the next level of assurance below an audit. Businesses in their first year of operations or businesses that are winding down operations can often benefit greatly from a review. Reviews typically take less time and cost less than financial audits. While banks often initially request or require an audit, they may, depending on the situation, be willing to accept a review instead.

Compilations can provide value in the right circumstance. While they do not provide any assurance — they assume the data provided by management is accurate — they can be very useful when businesses need to organize and standardize financial reports for internal use. Compilations also can be accepted by banks when seeking smaller loans.

Agreed-upon-procedures engagements are designed to provide a report of findings based on specific procedures performed over specified information. When a need for reporting is limited to specific information or transactions, a financial audit may cover a lot of unnecessary ground and fail to address critical reporting topics.

For example, some retail lease agreements provide for lease payments that are contingent upon the revenue of the tenant — when the tenant brings in more revenue, rent increases. In such a case, an agreed-upon-procedures engagement could provide targeted testing and reporting to the lessor that revenues have been accurately reported. A full audit would provide broad assurance at significant cost, but may fail to provide detail testing over reported sales numbers.

Which report is best to use?

Each report is designed to suit specific circumstances. Your internal needs and budget, as well as requirements from your bank or other parties, will determine the right solution. While large loans may require audited financial statements, banks may be willing to accept a review or compilation for smaller loans. If you don’t believe a full audit is necessary, you may consider asking your accountant for his or her opinion or even asking your lender if he or she will accept a review or compilation. It won’t hurt anything to ask, and it just might save you a lot of time and money.

Insights Accounting is brought to you by Sensiba San Filippo LLP

How planning now will lead to big tax savings next spring

Many Americans don’t choose to spend much of their free time thinking about taxes. In fact, many seem to view taxes as a seasonal obligation that requires attention just once each year.

Unless paying more tax than is required is desirable, proactive tax planning is a very good idea as many opportunities for tax reduction require action in the year preceding the filing of tax returns.

Smart Business spoke with Megan McManus, tax manager at Sensiba San Filippo LLP, to learn what can be done today to reduce the next tax bill.

Why are fall and winter critical times for tax planning?

A person’s tax returns are simply reporting requirements for taxes due from income earned in the prior year. By the time the taxes are owed and filing is required, many opportunities for savings have passed. Now is the right time to plan for next spring’s tax bill.

For individuals, many tax saving opportunities are accessed through employer-provided benefit plans. Most employers provide just one opportunity each year for employees to make changes to their benefit elections and various contributions. Each employer determines its own open enrollment period, but a large number of employers tend to offer an open enrollment at the end of the year, in November or December.

What are some significant opportunities to consider?

Retirement accounts provide one of the most significant saving opportunities available to employees. That’s why it is so important that employees take full advantage of any matching contributions an employer is willing to make to a 401(k) account. Contributing less than the employer match cap is essentially turning down free money.

In addition to traditional 401(k) plans, Roth 401(k) plans are an increasingly popular investment vehicle that is more often being offered to employees by many employers. A Roth 401(k) is very similar to a 401(k), but contributions to the former are made with after tax dollars.

A Roth 401(k) has the same annual contribution limits as a traditional 401(k) — $17,500 this year — but does not have the income limitations imposed on Roth IRAs, meaning higher-income taxpayers can also take advantage of the investment vehicle. Employees are advised to find out before the next open enrollment if their employer is currently offering a Roth 401(k).

What other employer-offered savings vehicles are available to employees?

Savings can also be created by contributing to a health savings account (HSA). These tax-free contributions must be used for medical expenses and any unused balance can roll forward every year. While HSAs are only available to those on high-deductible health plans, a flexible spending account (FSA) is not restricted to just high-deductible health plans.

An FSA does come with one significant catch — it’s a use it or lose it account. Only $500 can be rolled over from year to year, so it’s very important to carefully consider annual contributions.

What are some actions that should be taken now that will likely ensure savings later?

Remember that tax planning is an individual process. What is right for one individual or family may not be right for another. Understanding the opportunities, the current situation and future plans will allow a person to minimize his or her tax liability and maximize wealth.

Before the end of the year, or before the open enrollment period, it’s a good idea to sit down with a tax adviser. With his or her help, a plan can be developed based on individual needs and available opportunities.

Failing to plan now could lead to paying more than necessary next spring.

Insights Accounting is brought to you by Sensiba San Filippo LLP

Timely reconciliations aid businesses to prepare for smooth year-end audit

Businesses that reconcile their financial books at the end of each month will make it substantially easier for them to have a well-prepared, problem-free year-end audit.

“If you are reconciling every month, when you get to December you won’t find any surprises, which usually helps a great deal with the year-end audit,” says Leslie Prichard, CPA, audit manager at Rea & Associates.

Smart Business spoke with Prichard about how businesses can prepare for a calm, uneventful year-end audit.

What can businesses do throughout the year to secure a smooth year-end audit?

When conducting year-end audits, auditors will ask businesses for items such as new agreements, loan documents, contracts and board minutes. Keep those in an organized file so it is not necessary to track them down later when the business may be pressed for time.

With each year-end audit, the auditor provides management recommendations or any internal control findings. The following year, the auditor will usually require a statement outlining how the business responded to those points, so it’s a good practice to have that ready for the auditor.

Are there other steps that would be beneficial to take ahead of year’s end?

Usually, auditors aren’t working on-site with companies until a month or two after year’s end. While a business must wait until its books are closed to begin some tasks, in the meantime it can reconcile its significant accounts.

This is also an opportune time for a company to prepare supporting documentation such as bank statements, accounts receivable and payable aging reports, inventory valuation reports, fixed assets schedules and debt documents. In addition, a draft of the financial statements should be ready for the auditor to review.

Another good practice is for the business to meet with the auditor throughout the year to develop monthly and year-end closing processes. If an organization has any new or complicated transactions, it is beneficial to inform the auditor about the matter before he or she arrives.

When a company is being audited, should it fear that some blemishes might be discovered in its books?

The auditor is actually a company’s ally, not its adversary. He or she is not going to penalize the business. Should the auditor find something technically wrong, the business will be informed of the matter. If it is significant, the auditor will ask for it to be corrected. In the case of an insignificant error on the financial statement, the auditor will likely be able to pass on recording it.

The auditor may issue a management comment if there are problems with the accounting processes and procedures. This helps the business owner by keeping them informed of specific concerns related to the accounting department.

What are the particular advantages of meeting audit deadlines?

Meeting audit deadlines keeps a business in compliance with various agreements. Should a bank require an organization’s financial statement in the case of a loan, for example, an uncompleted statement may violate its loan covenants. For some construction contractors, not producing a financial statement on time limits the kind of work for which the company may apply. Investors may require financial statements by a certain date, and are often displeased if those statements are late. A business with overdue financial statements runs the risk of a lender calling in a loan or investors deciding not to loan the organization more money.

Is there any further advice that would be helpful at audit time?

A company has a voice during the audit, and if its representatives don’t understand why the auditors are asking specific questions, they should ask for clarification. If company officials understand what the auditors are trying to test, that knowledge will help them to design the most effective and efficient procedures to use during the audit.

Insights Accounting is brought to you by Rea & Associates

How enterprise risk management can impact a company’s value

Business operations are subject to a number of internal and external risks, as are ownership interests in businesses. How organizations and their owners address these risks can have a significant impact on the value of businesses and interests therein.

An enterprise risk management (ERM) process involves identifying risks relative to an organization’s objectives, assessing them for likelihood and impact, developing a response strategy and monitoring progress.

“A well-defined enterprise risk management process framework can protect and create value for organizations and their owners,” says John T. Alfonsi, managing director with Cendrowski Corporate Advisors LLC.

Smart Business spoke with Alfonsi about an ERM process and how it can benefit a company.

Where is risk addressed in a business valuation?

The most common method of valuing a business is the ‘income approach,’ which requires a valuation analyst to project a business’s future cash flows.

The analyst then calculates the present value of the sum of these cash flows by employing an appropriate discount rate. The valuation analyst must address risk in two primary areas: projected future cash flows and the discount rate. Effective ERM processes can help businesses increase value by affecting the estimates for these quantities.

How does risk impact projected cash flow?

There exists a risk that an organization will not achieve its projected figures.

As such, the process by which management projects future cash flows can impact a valuation analyst’s assessment of the business. A key risk in the process is information integrity, the quality of information generated through monitoring and data assimilation. Information integrity allows management to make well-informed decisions and should provide a valuation analyst with greater confidence in a business’s projections.

Valuation analysts can analyze information integrity by examining historical projections and assessing elements of the internal control environment.

A valuation analyst also should examine the variance between historical projections and a business’s actual performance. If a strong correlation exists, a valuation analyst can be highly confident in current projections, if the process employed by the organization remains constant. If not, the analyst must examine the variance between the past projections and actual performance to discern whether bias existed in past estimates and current projections.

What about risks in the discount rate?

The discount rate is the yield necessary to attract capital to a particular investment, given the risks associated with that investment. A project with relatively high risk will require a relatively high yield to compensate an investor for bearing these risks.

In determining the discount rate, there are two sources of risk that need to be quantified: systematic and unsystematic.

Systematic risk is the risk one must bear for taking on a risky investment in the market. However, systematic risk is estimated by calculating the return to public equities due to availability of data. The ERM process has little impact on systematic risks unless the business’s performance is heavily tied to market performance.

Unsystematic risk is sometimes broken down into two components, industry risk and company-specific risk. Industry risk reflects the risks identified with the industry in which a business operates. Company-specific risks encompass all other risks, including size, depth of management, geography of operations, customer and/or vendor concentration, competition and financial health.

How can ERM processes mitigate company-specific risks and increase value?

An ERM process should quickly gather and assimilate high-quality information for use in the organization’s decision-making process, allowing the organization to rapidly assess the impact and likelihood of risks associated with changes in its internal and external environments. Early assessment and mitigation can help preserve value and capitalize on risky events when competitors do not react as swiftly to environmental changes. ●

Insights Accounting is brought to you by Cendrowski Corporate Advisors LLC

How to get what you’re looking for when constructing a business deal

If you plan to sell your business and quickly sail off into your retirement years, you may want to think again. Your willingness to stick around after the transaction is complete, serving as a bridge from the past to the future, can go a long way toward maximizing the value of your company.

“Buyers aren’t going to feel comfortable acquiring your business if they know the intellectual capital is leaving the day after they close the deal,” says Rich Anderson, managing director for corporate investment banking at Moss Adams Capital LLC. “Buyers like to know that the principals, while they’re getting their liquidity event, are willing to stay and be there to ensure a smooth and orderly transition.”

The pursuit of liquidity is one reason for pursuing a transaction. Raising capital to expand your business is another. In either case, you need to take a thoughtful approach when pursuing a deal.

Smart Business spoke with Anderson about how to position yourself to make a smart deal for your business.

What’s the first step when considering the sale of your company?

Look at how your business is positioned in the market and try to make an informed and objective assessment of what the future looks like.

That is what potential buyers are going to key in on. Put yourself in the shoes of the buyer when starting out on a project. How is your company performing? What are the growth opportunities for your company going forward? What resources will it take to execute on those growth initiatives?

Sometimes the big need is capital resources. Other times there may be a need for managerial expertise. The business may need supply chain or distribution or sales and marketing expertise to accomplish those initiatives.

Once your objectives are clear, look at your business through the eyes of a potential investor or buyer so you can see how your business will be viewed if you go to market. It may be that after consulting with your financial advisers, you identify a number of opportunities to focus on in the next year or two to get more prepared to go to market. Or you may decide the time to go is now.

You need that rigorous analysis of your business and of shareholder objectives on the front end to help frame the thought process and decide if it’s now or later. That’s one critical element that’s done in markets both good and bad.

What kind of prep work can help the process run more smoothly?

You need to have a clear sense of what you want to accomplish. Are you looking to get out of the business entirely or just take on a partner you can work with? Your approach can vary quite a bit depending on your desired outcome.

It helps to have an adviser who can ask open-ended questions to drill down to your key objectives and get those out on the table for discussion. These are things you need to think about before you move ahead with any formal actions to ensure a smooth transaction for your business.

It will take time. If you’re thinking of selling your company in 2015, that doesn’t mean you’ll be exiting in 2015. You’ll probably be leaving in 2016 or 2017.

How do you protect against rumors of a possible sale getting out?

The goal is to run a very efficient and quiet process.

The reason you don’t want to announce your intention to sell is that there are no guarantees that the transaction is going to happen. When you go to market, the goal is to have a transaction take place. The market or the operating performance of your business could change, however, affecting the valuation and marketability of your company.

When you go to market, you need to have a nondisclosure agreement that prohibits any suitor or investor from contacting any employees in the company, customers or suppliers for any reason. The suitors need to maintain confidentiality by limiting the number of people within their own business who are aware that they’re in discussions with a target company. ●

Insights Accounting is brought to you by Moss Adams LLP

Why listening to your heart can be a risky venture in retail development

Starting a franchise or independent retail business can be both exciting and challenging. While there is much to know and learn, real estate procurement is at the top of the priority list.

Location, location, location. The phrase has been touted for years as the key to the success or failure of a new business. But in today’s retail world, knowledge has proven to be just as important — both concept knowledge and market knowledge, says Larry Schwartz, Director and Senior Consultant of the Franchise Services Group at RBZ.

One key to getting off on the right foot is having a clear understanding of your concept before you lay out your growth plan.

“Oftentimes, tenants, in their desire to grow or get open quickly, do not understand what is truly important to their brand from a site selection standpoint, which can result in a subpar location being chosen, or an inappropriately timed entry into a new market,” says RBZ Franchise Services Group affiliate Mike Leonard, Managing Partner of Keyser, a leading commercial real estate firm.

“We see it time and time again — a franchisee opening a store in a less than ideal site strictly because ‘it’s close to my house,’ or going into an outdated shopping center because ‘it’s where all my friends and I shop.’”

Knowing who your customer is and from where said customers are coming before starting the search for space is of the utmost importance.

Smart Business spoke with Schwartz and Leonard about how the ups and downs of the economy can affect retail development.

How has the retail search process evolved?

Once a tenant has established who their customer is and from where they are coming, the next equally important step in the search for space is formulating a plan for responsible growth and implementing strategic site selection.

But then how do tenants find space? Gone are the days of driving around and looking at ‘For Lease’ signs. That is a sure way to miss out on the premium location opportunities in today’s market. It’s how many tenants did it back in the early 2000s when it felt as though new retail development was everywhere.

Exciting new centers were popping up in every major town and there were ample opportunities for tenants/franchisors to more easily find space to aggressively grow their brand. Put in the legwork to learn about new spaces available in today’s market and your efforts could pay off in a big way.

How did the Great Recession affect retail development?

Many tenants were unable to pay their rent due to decreased sales. As countless large and small businesses shuttered their doors, shopping centers were foreclosed on, developers went out of business and vacancy rates rose across the board.

For tenants still in a position to grow, however, it was an incredible opportunity to secure the type of real estate that had previously appeared beyond their reach. Previously hard to come by locations opened up for the first time in years, and as small businesses slowly recovered, these premier locations were locked up and the great retail absorption was on.

Fast forward to 2014 and most of the premier locations have long since been gobbled up. While new development is again on the rise, the number of retail and quick casual restaurant tenants in expansion mode is far outpacing the amount of ‘A’ caliber sites coming out of the ground.

How are tenants combatting this inventory problem?

In today’s retail landscape, there is nothing more valuable than market knowledge. Knowing which tenants have expiring leases, which brands may be poised for a buyout and developing close-knit relationships with key developers in order to find out about new projects before they come online are all critical items to know in the race to secure premium locations in today’s commercial market.

Working with a commercial real estate broker who specializes in tenant representation can help you uncover these desirable locations. Taking the time to determine what truly makes your business tick will position you far better to experience sustained brand success. ●

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